COMMENT: Commerce and Consumer Affairs Minister David Clark announced this week the second set of tweaks to the ill-planned Credit Contracts and Consumer Finance Act (CCCFA). Initially focused on protecting consumers from predatory lending by making directors and senior managers of lending institutions personally liable for irresponsible lending, the act went further by detailing what a lender could and couldn’t take into account in terms of expenses when assessing a loan application.
Within two months of being passed, the act was being reviewed - surely a new record in government circles - showing just how destructive and off-target it was. It isn’t too far to suggest that this act is the primary cause of the pain in the New Zealand property market. In fact, a report released by the Council of Financial Regulators (COFR) has said just that. Where rising interest rates would have slowly put more burden on home buyers and cooled the market in an orderly fashion, the CCCFA unintentionally turned the taps off lending overnight.
As a result of the personal liabilities faced by senior staff at banks, lending applications, at least for a good few months after the act came into law, were assessed precisely as prescribed in the legislation. Over time, as banks have gotten more comfortable interpreting the act, they have brought back some rationality to the application process, but it is in no way reasonable.
The announced changes this week seek to make some more clarifications for lenders in general. The intent is to exclude discretionary expenses more explicitly and make debt restructuring more manageable. A discretionary expense is an expense a household can survive without - for example, the famous takeaway coffee - which most industry professionals agree should have been excluded from the beginning.
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Mortgage Lab founder Rupert Gough: "The CCCFA [has stopped] some worthy home buyers from getting mortgages." Photo / Fiona Goodall
While clarification and the removal of some discretionary expenses is a good step, the timing has many people concerned. Debate on the changes open on September 22 and will be implemented in March 2023. This means a full seven months of borrowers who could, under the reasonable stress tests that were already in place before CCCFA, afford a mortgage being declined. Declining these borrowers from the market is one of the prime reasons for the recent dip in house prices. The CCCFA is costing NZ households billions of dollars of wealth and equity while they wait for it to be corrected.
Most people don’t want to see the return to the property market state we saw over the past two years. But the property market can be controlled by several other levers, including Loan to Value Ratios, interest rates or even, in an extreme situation, Debt to Income Ratios. These levers are excellent because they can be turned on and off almost overnight as the market heats or cools.
But with the CCCFA stopping some worthy home buyers from getting mortgages, the risk is that the housing market falls further with no fix available until March next year.
There is one tiny bit of good news.
If you can meet the lending requirements of the banks in this market, there is little, if any, competition for houses. While economists are saying that there could be further house value reductions, finding a bargain should be slightly easier at the moment. For those who were frustrated while bidding against 20 other people at auction a year ago, now may be the time to purchase in a less stressful environment.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
